Wednesday, May 2, 2018

FI Ratio

FI Ratio is one of the quantitative relation that I would start to track in my quarterly dividend updates because they are such an important part of the whole financial independence concept.

The idea of the FI Ratio is simple.

Everyone has their very own definition of what financial independence meant to them but quantitatively it should at the very least cover their expenses through the reach of their passive income.

Most of us would start by working as an active employee earning active income which would mean our FI ratio would start from ground zero assuming you didn't have any savings back then. Over time, as we began to accumulate more savings strategy, we would start earning the interests from the banks which would qualify it as passive income. Based on this aspect, our FI ratio should over time continue its upward trajectory assuming the growth in the passive income outweigh the growth in the expenses.

The hardest part about getting from the late 20s to early 30s are the bombards of big item ticket expenses that would drown your savings down and expenses up. Imagine within a few years of working, one has to get married, buy a house, buy a car and have a few children. If this is not content enough, we have to add in travel, furniture and other expenses.

These expenses would push down our FI Ratio that we have to so hard painstakingly push up in the first place and only to see it getting right to where it all started.

Even if none of those took place, we would have to contend with the real threat of inflation as it would mean our expenses would be higher over time, assuming all else equal.

Passive income can be defined differently from many people but to me they are simply money that is not derived from my active income. This would include dividends from stocks, rental income from leasing your premise, and interest income from the banks or institutions.

What's my FI Ratio right now?

To be honest, I've never track my expenses nor my passive income too religiously so I am not aware of the exact numbers.

If I were to make a best estimate, our household FI Ratio would probably be in the range of 65% right now.

That would mean assuming I lose my job right now, I am able to cover 65% of our household expenses which would deem it insufficient. I would need to find other means to cover the rest of the other 35%.

I am expecting my expenses to be reduced in the longer years to come but will increase in the near term so that could put some pressure on the ratio.

In the meantime, I'll have works to do to continue pushing the ratio upwards, either by increasing the passive income or reducing the expenses or both ways.

Thanks for reading.

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  1. Hi B,

    to be frank I have not heard of FI ratio before. I am just ensuring that I increase my portfolio at a reasonable rate based on my abilities and increase my passive income. At the same time, watch my spending trend.

    1. Hi MIM

      Yeah its basically a tracking of how much passive income can cover the expenses basically what all of us are watching out for that haha

  2. Hi B,

    If I did not remember wrongly in one of your earlier post, you’d like to attain 1.5 x of your expenses by passive income.

    I guess this FI ratio here is somewhat in direct relation to that?

    Nonetheless, the 65% mentioned above is really good considering that you have a good fraction of your holdings that do not belong to the ‘income-intensive’ asset.

    Base on 6% and a 650k portfolio.. $3250 a month in passive income is very impressive. Not forgetting if the funds are used during financial crisis for income generating assets!!

    1. Hi Sleepydevil

      You have indeed a strong memory.

      Yeah I do look out for 1.5x for margin safety purpose but I suspect I’ll settle less than that since Im expecting the expenses to drop once the children is growing up a bit older.

      Meanwhile its forward to churning out more capital first to put into investment :)

  3. Hi Brian,

    Thanks for sharing on the concept of FI ratio. At some point we will need an indicator to measure how far we have come in this journey, and I believe this ratio does the job really well. Also, as we transit to the next phase in life, our FI will "reset" accordingly. For instance, I am only spending $1k per month now and I would achieve a FI ratio of 10%. However, this could change to 2 to 5% if I decide to settle down one day.

    1. Hi Jiawei

      I agree with you.

      Our expenses is also a moving target as we grow towards a different phase in life it will move up and down and in the latter part of the stage I think it will trend a lot lower.

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